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Gross Domestic Product (GDP) Gross Domestic Product (GDP) is one of the most important macroeconomic indicators for economists and investors. GDP measures how fast or how slow the domestic economy is growing. In simple terms, GDP represents the total value of all goods and services that were produced in the Indian and sold (both domestically or exported). Table 1 – GDP and Compnents By economic activity GDP at constant prices (A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) Agriculture, forestry and fishing Industry Mining & quarrying Manufacturing Electricity, gas & water supply Construction Services Trade, hotels, transport and communication Financing, insurance, real estate and business services Community, social & personal services GDP at cost factor Source : CSO. % share in current quarter (%, YoY) 17.3 Q1FY14 2.7 Q4FY13 1.4 Q1FY13 2.9 26.6 2.0 15.0 1.8 7.7 56.1 26.4 0.2 (2.8) (1.2) 3.7 2.8 6.6 3.9 2.7 (3.1) 2.6 2.8 4.4 6.6 6.2 1.8 0.40 (1.0) 6.2 7.0 7.7 6.1 17.7 8.9 9.1 9.3 12.1 9.4 4.0 8.8 100.00 4.4 4.8 5.3 Importance of GDP GDP consists of consumer spending, Investment expenditure, government spending and net exports hence it portrays an all inclusive picture of an economy because of which it provides an insight to investors which highlights the trend of the economy by comparing GDP levels as an index. GDP is used as an indicator for most governments and economic decisionmakers for planning and policy formulation In case of GDP, each component is given the weight of its relative price. In market economics it clicks as prices reflect both marginal cost of the producer and marginal utility for the consumer, i.e. people sell at a price that others are willing to pay GDP helps the investors to manage their portfolios by providing them with guidance about the state of the economy Calculation of GDP provides with the general health of the economy. A negative GDP growth portrays bad signals for the economy. Economists analyse GDP to find out whether the economy is in recession, depression or boom. GDP Impact on Bonds When the GDP report is released, its value is immediately compared to market expectations. The bond market is likely to react positively if the GDP value is at or below the expected value. This is especially true if real final sales are poor and inventories are increasing because of slowing demands. Flat or declining economic growth is likely to motivate the RBI to decrease the interest rates -- this can increase demand for bonds, and push prices higher. Conversely, the value of existing bonds could drop if GDP exceeds expectations. A strong GDP report coupled with rising inflation will increase speculation and fears that the RBI will increase short-term interest rates. GDP Impact on the Currency A strong economy supports interest rates and corporate profits. This combination attracts foreign investors to both the stock market and to the bond market. This attraction increases the supply of dollars, and can help increase the value of the rupee relative to other foreign currencies.